Weekly Market Review 04-10/05/2015

May Selloff Looms The month of May is already upon us and, of course, since the old saying goes “Sell in May and go away,” investors are worried about the possibility of an upcoming correction in stock prices. There is a good reason why investors like to rhyme “May” with “go away: the month of May has a reputation for being a “jinx” – a month historically associated with a selloff in the stock market. May, it seems, falls into a kind of “twilight zone,” coming between first quarter results and the rest of the year and it is when investors take the time to digest earnings reports and, equally important, earnings guidance, for the remainder of the year. If investors are disappointed this May, a selloff in major Wall Street indices, i.e. the S&P500, NASDAQ100 and the Dow Jones, would certainly not be an unexpected occurrence. Wall Street Reality Check Overall, with valuations on stocks at record highs, investors are exceptionally sensitive to disappointments. The expectation is for S&P500 companies, in the aggregate, to increase earnings by 2% year-on-year. Thus far, earnings have been slightly better than expected for some, including food giant, Kraft, Merck (the pharmaceutical behemoth), Microsoft, Starbucks and, most importantly, Apple. In fact, Apple has once again surpassed analysts’ expectations, bringing most analysts onboard to upgrade targets for the stock. However, there have also been some disappointments; Ford Motors’ earnings were weak and so were Pfizer’s, one of Merck’s major rivals. But undoubtedly the biggest shortfall was with Twitter, the tech giant, with earnings falling short of analysts’ expectations and a stock price that plunged in response by more than 18% in the aftermath of the earnings’ release. As May begins and investors begin to crunch the numbers for those earnings reports that have been released, trade on Wall Street is expected to be jittery with the risk of investors taking a collective step back running high. But while earnings, past and present, will be important to the performance of Wall Street indices as the week progresses, by week’s end sentiment will be dominated by none other than the main event – Friday’s Non-farm Payrolls report, which is expected to tilt markets across the board, from FX to commodities and, of course, indices on Wall Street. Non-farm Friday When it comes to Non-farms Payrolls or the NFP as its often called, investors are hoping for the best but preparing for the worst. The dollar’s bullish sentiment has turned shaky, largely due to the weak NFP figure last month which undershot the consensus of above 200K by a fairly thick margin, hitting only 126K new jobs. Now, if the NFP release this week revolves around 120-150K jobs, then the weakness in last month’s numbers might be interpreted as a trend, with investors turning sour on the US economy and with it, the US dollar. If, indeed, this is the case and the NFP figures are weak again, then appetite for selling dollars could rise while commodities and risk-oriented currencies such as the Euro and the Aussie could gain. And Wall Street? Despite the chance of a weakness in jobs postponing a Fed rate hike, there is also a high likelihood that investors would expect the weakness in jobs to translate to weaker earnings in the future. Hence, it will be the combination of earnings and the NFP that will shape sentiment for Wall Street. Nevertheless, and despite investors preparing for the worst, the truth needs to be told; statistically, the NFP does tend to edge higher after a sharp fall, which could mean that the chance for an upward figure of at or above 200K is not remote at all. This will, of course, be positive for the dollar and negative for commodities. Down to Business Overall, investors are approaching this week with an elevated sensitivity to bad news. When it comes to FX and the commodities markets, the NFP result is expected to be the dominant event. Any reading at 150K or below could reinforce downbeat estimates on the dollar and thus ignite more dollar selling against the Euro, the GBP and the Aussie. Moreover, commodities such as Gold and Oil, could edge higher. Meanwhile, on Wall Street, it will be a combination of earnings and the NFP that will shape sentiment. Fair earnings and strong guidance by companies in combination with a good NFP result will be a green light for the S&P500, the Dow and NASDAQ100 to edge higher. Disappointing earnings and guidance combined with a weak NFP could cause stocks to drift lower. On the PlateEurozone Manufacturing PMI(Monday) – Will provide a reality check on the Eurozone manufacturing sector. A reading higher than 51.9 would be Euro positive. RBA Rate Decision(Tuesday) – After the RBA surprised investors last month and left rates unchanged , investors will eagerly anticipate this week’s rate decision. Another upbeat statement from the RBA and the Aussie could gain further. ADP Employment Change(Wednesday) – Although the importance of the ADP change as an indicator of the NFP has diminished. The ADP will still provide some guidance ahead of Friday’s release. A reading above 200k could favor the dollar until Friday. Aussie Unemployment(Thursday) – In the aftermath of the RBA decision earlier this week , investors will watch Aussie unemployment for more clues on policy. If unemployment falls below 6.1% ,it will be interpreted as Aussie positive. UK Elections(Thursday) – UK elections due on May 7th will be highly watched by both among Sterling traders and FTSE100 investors alike. With polls showing a tie between the Tories and the Labor, it’s unclear which party will win. Moreover the effects on the Sterling and the FTSE100 are still unknown as both could be positive and negative for the UK economy. US Nonfarm Payrolls(Friday) – The main event of the week. If Nonfarm payrolls grow by 150k or less ,it will be highly negative for the dollar. Chart of the week – EUR/GBP

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